Question

Minden Company introduced a new product last year for which it is trying to find an optimal selling price. Marketing studies suggest that the company can increase sales by 5,000 units for each $2 reduction in the selling price. The company’s present selling price is $90 per unit, and variable expenses are $60 per unit. Fixed expenses are $831,600 per year. The present annual sales volume (at the $90 selling price) is 25,600 units.

Required:

1. What is the present yearly net operating income or loss?

2. What is the present break-even point in unit sales and in dollar sales?

3. Assuming that the marketing studies are correct, what is the maximum annual profit that the company can earn? At how many units and at what selling price per unit would the company generate this profit?

4. What would be the break-even point in unit sales and in dollar sales using the selling price you determined in (3) above (e.g., the selling price at the level of maximum profits)?

Answer 1

Answer to Requirement 1:

Answer to Requirement 2:

Break Even Point (in Units) = Fixed Cost / Unit Contribution Margin
Unit Contribution Margin = Unit Selling Price – Unit Variable Cost
Unit Contribution Margin = $90 - $60
Unit Contribution Margin = $30

Break Even Point (in Units) = $831,600 / $30
Break Even Point (in Units) = 27,720 Units

Break Even Point (in Dollar Sales) = Break Even Point (in Units) * Unit Selling Price
Break Even Point (in Dollar Sales) = 27,720 * $90
Break Even Point (in Dollar Sales) = $2,494,800

Answer to Requirement 3:

The maximum annual profit that the Company can earn is at 50,600 Units sold for a unit selling price of $80.

A further reduction in Selling price to increase units sold will decrease Net Operating Income.

Answer to Requirement 4:

Calculation of Break Even Point at Maximum annual profit level:

Break Even Point (in Units) = Fixed Cost / Unit Contribution Margin
Unit Contribution Margin = Unit Selling Price – Unit Variable Cost
Unit Contribution Margin = $80 - $60
Unit Contribution Margin = $20

Break Even Point (in Units) = $831,600 / $20
Break Even Point (in Units) = 41,580 Units

Break Even Point (in Dollar Sales) = Break Even Point (in Units) * Unit Selling Price
Break Even Point (in Dollar Sales) = 41,580 * $80
Break Even Point (in Dollar Sales) = $3,326,400